Maximizing Value Creation From Your Investment in Times of Uncertainty 3
Operational improvements are difficult to identify and implement without joint effort
and tight alignment between PE teams and portco leaders. Together they must be
intentional about implementing rigorous value creation programs as key pathways to
margin improvement.
Effective value creation programs enable PE investors and portcos to identify and deploy levers that make a significant
impact both quickly and over sustained periods of time, regardless of where we are in the economic cycle.
Our experience tells us that the following four levers have the greatest potential to produce the value that investors
expect over an extended holding period and during an era in which traditional strategic planning is likely to find itself
blindsided by disruption.
RELEASING
CASH AND
LIQUIDITY
FROM
WORKING
CAPITAL
While looking for operational savings and synergies, leaders ought to meticulously
assess their balance sheets to maximize liquidity and improve working capital. Working
capital is bound-up cash that is not available for growth; managing it better can release
a considerable amount of internal financing capacity.
Portcos have a variety of levers available to improve their working-capital positions. For
example, high inventories often signal weak processes and lack of controls. Reducing
inventory levels can be the first step toward tighter spend control and can produce nearterm
savings. High accounts receivables represent a similar threat. Reducing receivables
can decrease the risk of bad-debt expenses and improve working capital. In addition,
portcos can free up resources by outsourcing assets or operations, thereby (i) converting
fixed expenses into variable ones, which enables the business to adapt more easily to
fluctuations in cash requirements, and (ii) further improving working-capital management.
Both immediately and in the long run, balance sheet restructuring can make a business
less capital-intensive-which also can reduce the cost of organic growth when the
economy turns around. Consider the many well-known examples of companies that
have successfully shifted to cloud-based operating models like Adobe, Intuit, Netflix, and
Spotify. Originally built with on-premises infrastructure, these companies "variabilized" key
infrastructure costs, reduced capital expenditures, offloaded assets, improved working
capital, and increased scalability, ultimately insulating their balance sheets from future
market disruptions
EXHIBIT 1: DRIVERS OF VALUE CREATION IN PE INVESTMENTS (%)
Capital Structure Optimization Operational Improvement¹
Multiples Expansion
1. Revenue growth and/or margin improvement
18% 22%
36%
47%
31%
46%
39%
28%
51%
32% 25% 25%
0
20
40
60
80
100
1980s 1990s 2000s 2010s to Present
100% 100% 100% 100%
Source: Institute for Private Capital
1.